Chapter 2 Comparative Advantage and The Gains From Trade

Question 1

Opportunity cost

Answer 1

Value of the next best alternative

Question 2

Absolute advantage

Answer 2

One person has an absolute advantage over another in an activity if he/she takes less time to perform that activity then the other person

Absolute advantage refers to total productivity

Question 3

Comparative advantage

Answer 3

One person has a comparative advantage over another in an activity if his/her opportunity cost of performing that activity is lower than the other person’s opportunity cost

Question 4

The fact that each person has a comparative advantage in the production of one of the good suggest that if they _________ In the production of the good that they have comparative advantage on, they can jointly produce more

Answer 4

Specialize

Question 5

The Principle of comparative advantage

Answer 5

Everyone can potential he do better when each person concentrates on the activities for which his or her opportunity cost is lowest and then trade

Question 6

Production Possibilities Frontier

Answer 6

Graph of the boundary between those combinations of goods and services that can be produced and those that cannot

Question 7

Autarky

Answer 7

an economic system of self-sufficiency and limited trade. A country is said to be in a complete state of autarky if it has a closed economy, which means that it does not engage in international trade with any other country.

Question 8

Trade allowance both individuals to

Answer 8

Consume beyond their PPF’s

They can never produce above their PP they can never produce above their PPF’s

Question 9

Specialization allows them to use their comparative advantage to

Answer 9

Produce jointly more of both goods

Question 10

Since the total quantity of all goods is larger trade allows them to

Answer 10

Consume more of everything

Question 11

Any play on the front tier and any point inside the PPF are

Answer 11

Attainable

Question 12

Point outside the PPF are

Answer 12

Unattainable

Question 13

Production efficiency

Answer 13

We achieve production efficiency if we are at a point at which we can’t produce more of one good without producing less of some other good

Question 14

Economic growth

Answer 14

The expansion of production possibilities an increase in the standard of living

Question 15

What are the three key factors that influence economic growth?

Answer 15

• Population increases
• Capital accumulation is the growth of capital resources, which includes human capital
• Technological change is the development of a new goods and of better ways of producing goods and services

(Last two factors are the principle behind increases in output per worker or per capita)

Question 16

To use resources in research and development and to produce new capital, we must _____________________________________

Answer 16

decrease our consumption of goods and services today

opportunity cost of economic growth is less current consumption